NAB Morning Call

Where now for Europe?

Tuesday 9th July 2024

Financial Services Guide | Information on our services - NAB

It’s been a lacklustre day for markets. Equities have moved a little ahead of earnings season which kicks off in earnest later in the week. NAB’s Gavin Friend joins Phil to talk about the new French government, which will take some time to form. Will it be one of such compromise that nothing will be achieved? But is it symptomatic of Europe’s future. German trade data showed a sharp fall in imports yesterday. The EU is set to impose fines of countries falling outside their rules on government debt. Is there rally much hope for a European recovery? They also discuss Powell’s testimony tonight – will he use it as an opportunity to signal a change in attitude for the Fed? And NAB’s business survey is out today. Hopefully it will be a little more positive than last month.

Hosted on Acast. See acast.com/privacy for more information.

Duration:: 17m
Broadcast on:: 08 Jul 2024
Audio Format:: mp3

A French government that is somehow cobbled together with no real direction. German trade showing a big falling import, so we'd assume lower consumption levels. Countries steeped in debt with the EU wanting to rein it all in. Can Europe really bounce back when it's fighting against all of that? That's one question today. Plus, Joe Biden holds on. He writes to the Democrats, write a letter, at least that way. He finishes off the sentences, and Jerome Powell. Two days of testimony starts tonight. Will that signal any change in direction? That's going to be the focus in the next 24 hours. Isn't it? It's Tuesday. It's the 9th of July 2024. It's the morning call from NAB. Good morning. Slow moves on US stocks today. The Dow is marginally down at close. The S&P closes up 0.1% higher. But that is enough for it to hit the high for the 35th time this year, even though it's only margined up at the end of the day. And the Nasdaq climbing a quarter percent. Of course, earnings season kicks off again in a few days with many of the banks reporting on Friday. We've got a small rise in the US dollar, a close to 0.2% fall in the Aussie dollar, just below 67.4 US cents this morning. And the fact that that 0.2% fall is one of the bigger moves shows that there's not really a lot happening. On currency markets or bond markets for that matter, 10-year Treasury is a down one basis point. UK, 10-year guilds are the same. German 10-year buns are down two basis points. In France, 10 years are down five. Aussie 10 years were down four basis points yesterday to 4.36%. Two basis points lower than that on futures this morning. And oil is down a bit, 0.9% off WTI, 0.8% lower for Brent is 80 a barrel. So Gavin Friend is with me today from NAB in London, home of the new government. Just got the order from France, also heading for a new government. So let's start on France, actually, Gavin. So what happens next? And what does it all mean? Morning full. You say they're heading for a new government. Might take a little bit of time, I think. So the shock news, of course, was, from Paris late Sunday, that contrary to the polls that had showed the far right as the party, well out in front and most likely to get close to a majority, or thereby in a place to potentially form the next government. In the event, the leftist and centrist parties, as we know, agreed to sort of not cannibalise each other's votes into that crucial second round. And they decided to withdraw third place candidate, so as to put up a more solid fight against the far right. And that strategy turned out to be... So we know all of that. How long does it take to get to a point where they actually arrive at a government that can actually functionally? Oh, well, I mean, that's going to take a long time. I mean, so the choices really are that we have some kind of left-leaning minority government, which it will be unstable, it won't last long, and it kind of takes a bit of a risk in terms of France's fiscal position. The more left-leaning it goes, a centrist coalition of the left and the right will not include obviously the national rally far right. And it actually also would exclude the extreme left. This is Jean-Luc Millochon's France Unbowed Party. It won't include that. So that already splits up that four-party left-wing alliance and robs it of 78 votes. But if you do the maths, actually, it is possible to reach something that can get to a majority or close to a majority with centrist, a bit left and right. The problem is that we might say that they club together the left and the center ground to head off the far right. But there's no agreement there that they would actually take that further. Right. But aren't they actually going to be able to agree on anything, though? Or is it just going to be a government that just can't achieve? So the S&P, the credit ratings agency, has been out in the last 24 hours, saying our Hang Parliament is obviously going to complicate policy making. And they warn that if there's more debt or a sustained slump in growth, which could happen if the government can't make any decisions, that could also trigger a ratings cut. So obviously, that would be even worse if we did have the left coalition taking complete control. That's not going to happen. It's not going to happen. We can rule that one out. I mean, one of the things you could think about is Gabriel Atal, the outgoing prime minister, said that he will stay on as a caretaker until after the Olympics and until a government is formed. You've got the Olympics coming up in a couple of weeks. Most of France is off on holiday for most of August. And then you've got the issue of the autumn budget. Why not try and coalesce and get some kind of group around the budget that agrees it? Because if you get an agreement before that, it'll probably fall at the budget anyway, because they won't agree. So it could be weeks before we get somewhere. And then that brings you back, if you can't get a leftist or a centrist coalition together that is workable, because everybody wants something that somebody else doesn't want to give up. And we should say that, actually, there is some common ground on the left on the right in terms of the pension reforms. They want to repeal those and on cutting VAT for everyday items and things like that. To your point, that would come at a cost. If you're going to do that, where's the revenue you're going to get back in to pay for that? And that's where the ratings agencies will be hawking around. Well, not just the rating agencies. The EU will be. Yeah, the EU will be. But of course, the excess deficit procedure involves other countries as well. So one of the other issues is this much talked about possibility. If you can't get the sides together, you end up with a technocratic Italian-style government. France hasn't done this in the past. There's lots of people who said it won't work. But think about, I don't know, the names you might think about. Someone like Christian Neuier, former Bank of France governor and ECB council member. Someone like that, I'm not saying him particularly specifically, but someone like that that leads a team that comes together, that would play well with the ratings agencies and the IMF and the commission in terms of talking the talk with them. And maybe can keep the show on the road. And that's really what you're seeing today. If you look at the bond market reaction, we've had actually a narrowing of the spread between French 10-year and German 10-year yields, because markets are basically coming to the conclusion that this is a stalemate. There isn't going to be a left or a right-leaning. And actually, we're probably just not going to go anywhere. It doesn't worsen necessarily France's fiscal position if there's no spending choices, but actually it doesn't make it any better either. So I wonder what the future is for Europe as a holder. What does this mean for Europe? Because if we've got a French government that's not going to get anything done, lots of countries, as we've said, are about to have their debt reined in by the EU. So there's going to be cuts to government spending, you'd imagine. German suffering of fall in international trade, which we can talk about with the numbers that are just out. Europe's had five quarters of stagnation. Europe area GDP grew by 0.3% in the first quarter of 2024. That's the first bit of growth, green shoots. Or is it just all just more stagnation? What's the position Europe's in right now? Well, there are different things for different countries. Political paralysis looks like it's going to be the case for France. We know that in other countries, Germany growth, the growth is stuttering, but there the country is leaning right. We're going to see in September some elections in some of the big eastern states, Saxony Brandenburg during the year where they're likely to go hard right to the ADF. There's not a German government election until next September. That'll probably go, given the state that the current three-party coalition is in to the Christian Democrats. That's what happened in the EU parliamentary election. So Germany tax right, along with some of the other countries in Europe. Italy is already right. We've got Hungary, we've got Austria, and so from that point of view, why are these countries turning right? It's because citizens are not happy with what's going on with the economy, with the red tape, with immigration, a whole host of issues. And so, the centre ground of the European government is having to shift right, where at the same time that the extreme right parties are coming towards the centre ground, because as they get power, there's a reality check. And the hope is that they can change policy and make it less red tape, make it better for the future in terms of how they see it. But there are risks with this. But then you look at other countries like Spain. A growth model there seems to be holding up quite well. There isn't a single solid picture. It's all bits and pieces and it's... Manufacturers are a bit of a cross-rope. It is, it is. Yeah, and they've gone on that. So Germany's balance of trade improved, which I think is fantastic, but it only improved because exports and imports are both down, just the imports are actually down more. So 6.6% down, year on year. Exports down 3.6%. I mean, none of that sounds particularly healthy for Germany, does it? Look, the exports side of the drop was pretty much flagged up by the advanced EU numbers. So I don't think we should be too worried about that. To your point, the 6.6% fall in imports, the forecast was down 1%. Now, if we look at the detail there, there was a 9% drop-off from German imports from other EU countries. There was a 9%, actually more than 9% fall from imports from the UK. There was a 1.7% rise in imports from China and nearly 5% from the US. So we've got some issues there from imports from other EU countries and the UK. On its own, it suggests, perhaps potentially, a weaker growth profile. But as we've talked before, there's a tailwind to growth in Europe, in Germany, from lower inflation, higher nominal incomes and lower energy costs. That big picture view of, and it's the same in the UK, of things picking up, is hard to square with a collapse in imports. So we'd be taking this number as this is one number. Let's see how things play out. You would be looking for things like whether there's a big dump in inventories and what have you, because the good news of this is it means you get higher net exports, right? Therefore, the trade balance has risen to the recent high of $25 billion from $20 billion. It's good for GDP. It's not good for consumption, though. It might be good for GDP, but then, as I say, you've got the consumption at risk and then you've got, normally alongside that, you would have a dump in inventories. So that may well detract from GDP, from the higher net export view. So it's the same we've got away for the next one. We've got away for the next one. And I would just say, just to finish off, where is Europe going? It's worth just saying here that Europe is at a crossroads. There's all sorts of stuff going on. There's the Draghi report, the letter report. Europe is scratching around and it needs to, it's a shame actually that what's happened to Macron, because he was one of those guys on the stage who was trying to bring the big arguments as to what does Europe do in the position that it's in at the moment. And so, potentially with the German government in the situation it's in, where are the big voices, right? That's the issue. And interestingly, you know, move to the UK. You've got a Labour government with a big mandate already the new foreign minister, David Lamy, straight across to Germany, Sweden, Poland at the weekend, wasting no time talking about closer ties, perhaps on defence and security, helping out on immigration. Europe is going to be very nervous about the wary of the UK for good reason, because of what's happened before. But actually, these are all things that are pragmatic things that the government can do. We are where we are. How do we make the best of the situation we're in? And I think Europe will welcome the UK sort of security and defence and the overtures on closer ties. It seems generally quite positive, doesn't it? I mean, we haven't got time to dwell on this for too long, but Rachel Reeves is the new chancellor, gave a very positive speech as well during the day in the UK. I mean, they really are knuckling down and, you know, some direction at least for the UK. You can argue whether it's the right direction or not, but at least they're heading somewhere. Look, you've got to think about this. I mean, Keir Starmer has got this idea that for every, he wants to remake sort of the patchwork of the UK, you know, wants to give confidence so that businesses invest private investment. He's got an idea that for every pound of government spending, because he's got no money, he can get three pounds of private investment. And he's got to do that by, you know, really laying out this new plan for infrastructure, for energy production, all these kinds of things. He's bought in lots of experienced people from business and industry to head up departments and work with the government officials, so that they've got a skin in the game, ownership. How do we make this thing and not just in a sort of a five-year short-term political cycle? I mean, it all, it does feel like, to your point, a step change. You know, there's a more positive mood here. And I think, you know, markets seem ready to embrace that. Rachel Reeves setting out new planning laws to literally, you know, put spades in the ground, because that's an easy, a stroke, easy win if they can get through some of the resistance in local house building to get, you know, to get spades in the ground if you like, and also in, you know, data centers and infrastructure building and other bits and pieces. So, you know, you're not wasting any time. Yeah. Yeah. So, well, all good then, we hope. So Jerome Powell starts testimony today and tomorrow, actually, one o'clock in the morning, Australia time. I think Janet Yellen is involved in that testimony today as well. It's going to be interesting to see what they've got to say ahead of the CPI, obviously, later in the week. Yeah. So, this is Powell's, you know, one of his twice a year set pieces, two performances, Tuesday and Wednesday in front of Congress. The backdrop of this, of course, is a couple of, you know, a couple of benign core CPI core PCE numbers after the scare that we had earlier in the year. And that's making, you know, the Fed seem, you know, like a bit more progress has been made to bring inflation down and where in Portugal last week, we heard from, you know, the Fed Chair Powell that recent data, you know, was, they were seeing is more encouraging, but they wanted to be, they wanted to see more of it to be, to be confident that the move down to inflation is sustainable. There's a general view, I think, out there that the Fed will need to see a couple more prints on this. We get the June CPI on Thursday to your point where the forecast is for another benign point two on the core. You get that and you've had three fairly benign numbers following the three nasty point fours, arguably they want to see another one. The labor market, as we saw from the non-farm payroll on Friday, yes, strong, still, 206,000, but there's that big downward revision, which is the, you know, what we saw to the higher numbers early in the year as well. And then you've got other bits of evidence, you know, like the average early earnings is drifting back down within below 4%. The jobs numbers, they were higher last week, but look at the trend much, much lower. And if you looked at the ratio of job openings to unemployed workers, it's right back down to where we were pre-pandemic. We've got the rising weekly jobless claims. We've got unemployment rates, the U3 number out last Friday. It wasn't at 4% or 3.9, it jumped to 4.1 here. And this is the big worry for the Fed. They've got no line of sight to know whether this is the beginnings of a more sustained up move in that unemployment rate. And it's the one data print above all that would see them potentially change track if they were getting a bit nervous. All the reasons for that to move sooner. Well, I mean, just saying, I mean, you know, we don't, we don't think that he's got a line of sight of a CPI number on Thursday. So maybe, you know, he has fed, Fed chairs in the past have used this event to kind of tee up a slight change in tact. It seems as possible, but perhaps more likely he'll wait for CPI and then maybe at the FOMC at the end of the month, 31st of July, if he wants to give a slight nod towards September, providing the data, stay the course that we're going to see. Well at a time. I mean, so very quickly, I mean, Joe Biden, over the last 24 hours, he's written to the Congressional Democrats saying that he's going to run the race to the end. And all the talk of other contenders has to stop. He said he wouldn't be continuing if he was confident that he could beat Trump. The problem is not everyone else shares his confidence, do they? To date, the now business survey for June last time, of course, business confidence was down, costs and prices were rising. I mean, it was sort of the worst of both worlds last time, wasn't it? Yeah. And I guess that combination, I mean, it reflected the weaker Q1 GDP numbers we saw at the same time, the prices indexes and labor costs were a little bit higher. And that suggested to us back in May that the sort of process of bringing supply and demand back into balance, you know, sort of remains incomplete and reinforcing view that inflation will continue to moderate, only gradually from here. So we'll have to see what shows up in the June survey. And also the consumer confidence numbers for Australia, which ticked up a little in June. Yeah, it didn't go any other way. That's right. Yeah, it's definitely cool. I'm better than last year. So maybe the trend is up. We'll see what that does today. Good to talk Gavin. Catch you very soon. Cheers, Phil. And that's Tuesday morning's morning call. I'm back tomorrow. I'm Phil W for now. Thanks for tuning in.